Foreign Currency Market Update – GBP / USD Update
The Pound to US Dollar exchange rate recovered from a four-month low last week and registered a 220-pip rally in reaction to upbeat statements from Bank of England policymakers.
A technical bounce took GBP/USD higher from 1.5180 to 1.5280 on Tuesday morning as Sterling finally broke the sequence of ten consecutive days of decline against the ‘Greenback’.
And the Pound pushed further ahead on Tuesday when news of a potential £3.5 billion takeover of British insurance firm Amlin from Japanese company Mitsui Sumitomo Insurance bolstered British sentiment. GBP/USD rallied to 1.5400 in response.
Wednesday saw ‘Cable’ soften slightly to 1.5360 as investors reacted to a downbeat -0.8% decline in manufacturing production, a disappointing -0.4% dip in industrial output and a nine-year low -9% plunge in exports, which took the deficit up from -£8.5 billion to -£11.1 billion. Sentiment towards the ‘Greenback’ was hurt by comments from World Bank chief economist Kaushik Basu urging the Federal Reserve not to raise interest rates at this juncture.
The Pound rose to a fortnightly high of 1.5475 on Thursday when the Bank of England’s latest minutes report revealed that the current crisis in China was not deemed serious enough to alter monetary policy in Britain. The positive BoE rhetoric continued on Friday when policymaker Kristin Forbes said that interest rates might need to start rising sooner-than-anticipated if the strong Pound continued to have only a minimal impact on inflation. Additionally, over the weekend MPC member Martin Weale commented that rates would need to rise ‘relatively soon’ to pre-empt a surge in inflationary pressures due to rising wages.
However, markets still don’t have a BoE rate hike priced in until the third quarter of next year, which means that there is potential for Sterling to rise if speculators begin to shift their expectations in line with the Bank of England’s upbeat rhetoric.
The standout event on the economic calendar this week is Thursday’s interest rate decision from the Federal Reserve. Most traders reckon the central bank will leave interest rates on hold but there is a good chance that Fed Chairwoman Janet Yellen will indicate that rates will rise by the end of the year. Under these circumstances GBP/USD is likely to rally as traders push back their long-term expectations for US interest rates. Another option is that the Fed could hike rates in September but commit to keeping rates on hold for a certain period of time. This would also be liable to hurt the ‘Greenback’ if the stated period was a long amount of time. Alternatively the Fed could drive the US Dollar higher if it elects to raise rates in September and keeps the door open to another rate hike in December.
Other releases, such as UK inflation and unemployment, will have an impact on GBP/USD but the Fed decision is liable to overshadow these events on Thursday evening.
Heads Up
Summary of major upcoming data releases that we think may move the market.